Eduard von Kymmel (VP Fund Solutions): Luxembourg’s opportunity as an ESG fund hub
This decade will see ESG criteria move from an option for the asset management industry to a standard requirement, perhaps even a legal one, argues Eduard von Kymmel, CEO of VP Fund Solutions in Luxembourg.
How important are ESG criteria for funds today?
My personal belief is that there will be two fundamental changes to the industry over the next decade: digitalisation – which will enable us to enhance our performance, thanks to input provided by robotic processes – and ESG. There are many reasons for this: the need to protect the environment, the mindset of the new generation, and the value that environmental, social responsibility and governance criteria creates for asset managers and end-investors. Just days after I wrote in finews expressing this view, Blackrock announced it would integrate ESG criteria into all its active portfolios and advisory strategy by the end of this year. At the World Economic Forum in Davos, executives of US fund organisation NICSA and Hong Kong’s HKIFA as well as European Commission president Ursula von der Leyen all agreed on the vital importance of this global trend. However, we must also be vigilant about greenwashing, which could slow meaningful change and tarnish the image of ESG-compliant investment.
“Luxembourg is already recognised as the top fund domicile for clean energy, impact investment and microfinance.”
How is VP Bank adapting to this trend?
ESG is an important part of our DNA – VP Bank Group’s main shareholder is a non-profit foundation that uses the dividends it receives to support charitable goals such as funding culture and helping young people. Our open architecture approach means we mostly do not manage our own funds, so we are constantly looking for the right partners that fit our clients’ needs and philosophy. We have hired a dedicated ESG team and are launching initiatives such as creating an ESG rating system, integrating our own standards and policies and supported by global recognised rating providers such as MSCI. As a management company, we identified the need last year, given the growth of illiquid funds and the huge demand for infrastructure investment. One of our clients which runs a clean energy fund has seen assets rise from €2m five years ago to €100m two years ago and now €250m – that’s how strong the trend is. Another client, a small Swiss asset manager, set up a fund to invest in wind parks with €30m to €40m and manages €250m today. Luxembourg is already recognised as a leader in ESG investment as the top fund domicile for clean energy, impact investment and microfinance offerings.
How do you see ESG investment in five years’ time?
I’m convinced it will become the mainstream, and that managers, whether in equities, bonds, real estate or private equity, will have to comply with ESG criteria, perhaps enforced by law. It starts with risk management asking on a regular basis whether potential investments entail any ESG. But the industry needs more guidance on what constitutes ESG. Is Tesla ESG-compliant? Investment by coal-fired energy plant to reduce its carbon footprint? Airbus? Lufthansa? In my opinion, if they have a long-term strategy to reduce carbon emissions, they may be considered ESG-compliant. In the Nordic countries, Copenhagen airport has launched an ambitious climate strategy designed to make it carbon-neutral this year. Within the next five years, I believe, all transportation will be electric there. In short, ESG will become a standard characteristic for assets. Fifteen years ago, reputational damage did not have a major impact on share prices – now it can have a huge impact in a single day. ESG will make investors more comfortable, more trustful and perhaps more loyal.